100kg of horse meat has been imported into the UK and falsely labelled as beef in Lancashire and Liverpool, with 40kg (88lb) of it already sold to the public.
The meat was imported by Hungarian Food Ltd in Preston, Lancashire, and sold on its market stall in the town and a shop in Liverpool called Taste of Hungary, the Food Standards Agency (FSA) said.
It said the discovery of the horse flesh, being sold in 1kg bags labelled as "diced beef", was made by Lancashire County Council.
The remaining unsold meat has been withdrawn from sale.
The manager of the Taste of Hungary deli ate some of the horse meat he bought, thinking it was beef, he said.
Attila Fabian, who runs the Eastern European store in Waterloo, Merseyside, said he was shocked to have discovered he had been selling the meat when environmental health officers visited the shop.
He said he had bought 20 1kg bags of what he thought was diced beef from Hungarian Food Ltd in May last year, rather than import it directly, but it sold so badly that he took four or five bags home for his family.
"I didn't know about it," he said.
"It tasted like beef, it looked like beef.
"I was shocked today when environmental health told what happened exactly."
He said they sold 12 or so bags of the horse meat, and there were still three bags in the freezer which were taken away today for tests.
He said the shop had ceased trading with Hungarian Food Ltd after they "fell out" in July last year.
Shadow environment secretary Mary Creagh said: "This worrying development means the horse meat scandal has spread from supermarkets and schools through to market stalls.
"Ministers should have started testing for horse meat as soon as it was discovered in January to get this illegal meat off our streets. Their delay means this scandal still has a long way to go."